Ukrainian state-owned gas company Naftogaz is facing another
tense standoff with Russia over gas payments that threatens
supplies to the rest of Europe.

On Tuesday, Alexey Miller, CEO of Russia's
own state-owned gas behemoth Gazprom, told journalists that
Naftogaz had failed to pay for its March gas deliveries and
threatened to terminate the contract with his Ukrainian
counterparts — potentially cutting off supplies to Europe through
Ukraine as early as Friday.

Something like this happened in 2006 when a Russian gas
cut triggered fuel shortages
in France, Italy, Germany and Poland.

It takes about two days to get payment from Naftogaz deposited to
a Gazprom account. That's why a delivery to Ukraine of 114
million cubic meters will lead to a complete termination of
Russian gas supplies as early as in two days, which
creates serious risks for the transit to Europe.

This is a big problem for both Ukraine and Europe. Austria
depends on gas supplies through Ukraine for almost 15% of its
energy needs, while Italy gets around 13% from the same source.
Greece and France would also see their energy supply disrupted.

For Ukraine itself a cutoff would be even more severe. Not only
do Russian gas supplies account for 58% of gas consumed in the
country but transit fees to Europe are also a key source of
revenues for the cash-strapped government in Kiev.

One of the major issues is that since February 19 the government
in Ukraine is no longer supplying gas to the breakaway regions
of Donetsk and Lugansk, controlled by pro-Russian
separatists. However, Moscow has since supplied 12 million
cubic meters of gas directly to the self-proclaimed "people's
republics" and is counting it as part of the October deal.

Of course, this isn't the first time the two sides have fallen
into a dispute.

Negotiations over gas deals have proven a source of
continuous friction between Kiev and Moscow in recent years. In
2006 Gazprom, Russia's state-owned gas company, cut off
supplies to Ukraine in a row over accusations that the
Ukraine capital was syphoning off gas destined for European
markets to supply its domestic market. The move led to shortages
in France, Italy, Germany and Poland.

This dangerous game of chicken,
however, is unlikely to please Ukraine's partners in Europe who
have just pledged new money for the country under
a $40 billion bailout deal brokered by the IMF. Under the
deal the IMF will inject a further $17.5 billion with as much as
$10 billion coming from the US and the European Union.

However, in the past the EU has
been clear that it would not allow emergency funds to be used to
pay off Ukraine's past gas bills. After all, at this stage Kiev
is effectively being asked to transfer bailout funds to the
country it accuses of provoking and sustaining a civil war on its
territory.